As for the way it works: http://en.wikipedia.org/wiki/Embossing_tape (method)
God, I love these things! ;-)

Dymo tape embossers come in a variety of sizes. I have owned several, ranging from 1/4" to 1" tape widths; 3/8" is the most popular. The designs used in the earlier labelers were not exclusive to DYMO, but also available in other brands, including Avery, Labelmate, etc.. Later labelers from DYMO appeared to all have the same square-letter design. You can see what this one looked like by searching for the free font 'Punch label' (sorry that I don't know who to credit for its authorship). I would contact DYMO directly to find out where and how their designs originated. One thing I enjoy with these tape guns or labeling machines is sending different types of media through them, like heavy cover stock (cut into strips).

When I was about nine years old, I had a toy printing press made by Mattel called a Linoprinter that used embossed tape to set type which you would stick onto plastic printing plates. The letters came out backwards, of course. One of the more interesting uses of embossed tape that I can recall.